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UPS Fears Continuation of Losing Streak by California Appellate Court

Would you buy a franchise if the franchisor had an unfettered right to completely change the business model at any time and prevent you from renewing your current agreement unless you adopted the new business model?This is the essence of the latest appeal before the California Court of Appeal on behalf of the Mail Boxes Etc. franchisees who refused to convert to the UPS Store franchise business model in 2003. To date the lower court has consistently ruled against the franchisees and the Court of Appeal has just as consistently over turned the Superior Court in this eight year old litigation.

Quoting from the franchisees reply brief filed May 12, 2011 with the California Court of Appeal, franchise plaintiff attorneys Gordon & Rees dispute respondent UPS' argument that they can change the franchise at will upon renewal, just so long as the renewal is on the same terms then being offered to new franchisees buying into the system.

Score: Franchisees - 5 | Franchisor - 0

"Without any extrinsic evidence to support their interpretation, respondents boldly assert that the drafter of this adhesion contract did not really mean "MBE Centers" in the renewal provision, but rather used that term as a proxy for whatever franchise any acquiring franchisor might offer in the future, regardless of whether such franchise even resembled an MBE Center….Respondents also claim that unless a provision of the Agreement expressly prohibits their conduct, there is no limit to the detrimental changes they may impose on unsuspecting franchisees. This statement is characteristic of UPS' arrogance, but is unsupported by California law. Rather, good faith and fair dealing limits the stronger party in a contract of adhesion from exercising its discretion in such a way as to interfere with the adherent's rights. Importantly, this is not an agreement negotiated at arms-length by parties of equal bargaining power. As such, California law protects the reasonable expectations of the adherent to ensure that rights conferred by the agreement are not abrogated by the stronger party. Using the cannons of construction within the framework of the circumstances, and the rules governing the adhesion contract at issue, there is only one reasonable conclusion: this Court should reverse the trial court's erroneous ruling and issue a ruling confirming that McDougal purchased an agreement with the right to renew its MBE Center franchise, which has a unique and defined meaning under the Agreement."

This appeal has recently been joined by another appeal filed on behalf of those Mail Boxes Etc. franchisees who succumbed to UPS' unsubstantiated claims that the UPS Store outperformed the MBE Centers in marketing tests in several key metrics, including net profits.. These MBE Center franchisees who were induced by these misrepresentations, then converted to UPS Store franchises are part of a certified California and national class action against UPS. The class was certified by the trail court in 2007. However, in 2010 the same trial court granted UPS' motion for summary judgment which claimed that there were no triable issues of fact.

Again quoting from the franchisee's Class Action brief about the actions of respondent UPS:

"First, the trial court ruled as a matter of law that Respondents' representations were not false, despite conflicting evidence demonstrating numerous triable issues of fact as to the falsity of Respondents' statements. For example, Woodard produced evidence that Respondents represented to Woodard that, "The UPS Store brand out-performed the other two brands when measured by year-over-year comparisons" for "net profit from all … services combined." Despite admissions by Respondents that they did not even compile net profit data, the trial court erroneously ruled as a matter of law that this statement was not false…. MBE president Stuart Mathis testified that Respondents did not collect net profit data, and they "really had no ability to measure that [net] profitability. Echoing Mathis, MBE's director of marketing confirmed that Respondents had "no systematic means of collecting" profit and loss data from the test stores.

"The trial court failed to consider whether Respondents' fraud in the inducement to sign the Gold Shield Amendment negated the integration clauses. Woodard also produced evidence demonstrating triable issues of fact on that issue."

"It is well established that when a defendant makes false statements and conceals material facts to induce reliance, the defendant "cannot rely on the disclaimers to escape liability if there were intentional misrepresentations."

Summary judgment must be reversed because each of Woodard's claims turns on numerous issues, on which there is conflicting evidence.

Of significance, the most damning evidence of the lack of reliability of the test results that UPS used to scare franchisees into abandoning the successful MBE business model, is the report of the Boston Consulting Group which UPS has suppressed since 2006. As reported in Blue MauMau, this study commissioned by UPS indicated that 77% of the converted UPS Stores are at financial risk.

In the intervening eight years UPS has steadily pulled away from consumer shipping as the main profit center for The United Parcel Service Store franchise, and instead promotes print and copy services as the only way for their franchisees to be profitable. MBE was profitable as a pack and ship business until UPS destroyed that brand and converted their franchises into staffed drop boxes for UPS packages, for which their franchisees receive a pittance.

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